CHAPTER 4 CHAPTER 4
1.
1. Premier Company's net profit margin is 8 percent, total assets turnover ratio is 2.5Premier Company's net profit margin is 8 percent, total assets turnover ratio is 2.5 times, debt to total assets ratio is 0.6. What is the
times, debt to total assets ratio is 0.6. What is the return on equity for Premier?return on equity for Premier?
Solution: Solution:
Net profit Net profit Return
Return on on equity equity ==
Equity Equity =
= Net Net profit profit Net Net sales sales Total Total assetsassets x
x xx
Net sales
Net sales Total assets Total assets EquityEquity 1
1 =
= 0.08 0.08 x 2.5 x 2.5 x x = = 0.5 0.5 or or 50 50 per per centcent 0.4 0.4 Debt Equity Debt Equity Note : Note : = 0.6 = 0.6 So So = = 1- 0.6 1- 0.6 = = 0.40.4 Total
Total assets assets Total Total assetsassets Hence
Hence Total Total assets/Equity assets/Equity = = 1/0.41/0.4 2.
2. The The following following information information is is given given for for Alpha Alpha CorporationCorporation
Sales 3500
Sales 3500
Current
Current ratio ratio 1.51.5 Acid
Acid test test ratio ratio 1.21.2 Current
Current liabilities liabilities 10001000 What is the inventory turnover ratio? What is the inventory turnover ratio?
Solution: Solution:
Current
Current assets assets = = Current Current liabilities liabilities x 1.5x 1.5 = 1000 x 1.5 = 1500 = 1000 x 1.5 = 1500 Quick
Quick assets assets = = Current Current liabilities liabilities x x 1.21.2 = 1000 x 1.2 = 1200 = 1000 x 1.2 = 1200 Inventories Inventories = = 300300 3500 3500 Inventory
Inventory turnover turnover ratio ratio = = = = 11.711.7 300
300 3.
3. The The following following information information is is given given for for Beta Beta Corporation.Corporation.
Sales 5000
Sales 5000
Current
Current ratio ratio 1.41.4 Inventory
Inventory turnover turnover 55 ratio
ratio Acid
Acid test test ratio ratio 1.01.0 What is the level of current liabilities? What is the level of current liabilities?
Solution: Solution: Inventory Inventory = 5000/5 = 5000/5 = 1000= 1000 Current assets Current assets Current
Current ratio ratio = = = = 1.41.4 Current liabilities
4.
4. Safari Safari Inc. Inc. has has profit profit before tbefore tax of ax of Rs.90 mRs.90 million. illion. If If the company's the company's times times interest coveredinterest covered ratio is 4, what is the total interest charge?
ratio is 4, what is the total interest charge?
Solution: Solution: PBT PBT = Rs.90 = Rs.90 millionmillion PBIT PBIT Times
Times interest interest covered covered = = = = 44 Interest
Interest So
So PBIT PBIT = 4 x Interest= 4 x Interest PBT = PBIT
PBT = PBIT – – interestinterest = 4x inter
= 4x interest- est- interest interest = 3 = 3 x interest x interest = 90 = 90 millionmillion Therefore
Therefore interest interest = = 90/3 = 90/3 = Rs.30 Rs.30 millionmillion 5.
5. A has profit before A has profit before tax of tax of Rs.40 milRs.40 million. Ilion. If its f its times times interest interest covered ratio covered ratio is 6, is 6, what is what is thethe total interest charge?
Solution:
PBT = Rs. 40 million PBIT
Times interest covered = = 6 Interest
So PBIT = 6 x Interest PBIT – Interest = PBT = Rs.40 million
6 x Interest – Interest = Rs. 40 million 5 x Interest = Rs.40 million Hence Interest = Rs.8 million
6. McGill Inc. has profit before tax of Rs.63 million. If the company's times interest covered ratio is 8, what is the total interest charge?
Solution:
PBT = Rs.63 million PBIT
Times interest covered = = 8 Interest
So PBIT = 8 x Interest
PBIT – Interest = PBT = Rs.63 million
8 x Interest – Interest = 7 x Interest = Rs.63 million Hence Interest = Rs.9 million
7. The following data applies to a firm : Interest charges Rs.200,000
Sales Rs.6,000,000
Tax rate 40 percent Net profit margin 5 percent
What is the firm's times interest covered ratio? Solution:
Sales = Rs.6,000,000
Net profit margin = 5 per cent
Net profit = Rs.6,000,000 x 0.05 = 300,000 Tax rate = 40 per cent
300,000
So, Profit before tax = = Rs.500,000 (1-.4)
Interest charge = Rs.200,000
So Profit before interest and taxes = Rs.700,000
Hence 700,000
Times interest covered ratio = = 3.5 200,000
8. The following data applies to a firm: Interest charges Rs.50,000
Sales Rs.300,000
Tax rate 25 percent
Net profit margin 3 percent What is the firm's times interest covered ratio?
Solution:
Sales = Rs.300,000
Net profit margin = 3 per cent
Net profit = Rs.300,000 x 0.03 = 9,000 Tax rate = 25 per cent
9,000
So, Profit before tax = = Rs.12,000 (1-.25)
Interest charge = Rs.50,000
So Profit before interest and taxes = Rs.62,000
Hence 62,000
Times interest covered ratio = = 1.24 50,000
9. The following data applies to a firm :
Interest charges Rs.10,000,000
Sales Rs.80,000,000
Tax rate 50 percent
Net profit margin 10 percent What is the firm's times interest covered ratio?
Solution:
Sales = Rs.80,000,000
Net profit margin = 10 per cent
Net profit = Rs.80,000,000 x 0.1 = 8,000,000 Tax rate = 50 per cent
8,000,000
So, Profit before tax = = Rs.16,000,000 (1-.5)
Interest charge = Rs.10,000,000
So Profit before interest and taxes = Rs.26,000,000 Hence
26,000,000
Times interest covered ratio = = 2.6 10,000,000
10. A firm's current assets and current liabilities are 25,000 and 18,000 respectively. How much additional funds can it borrow from banks for short term, without reducing the current ratio below 1.35?
Solution:
CA = 25,000 CL = 18,000 Let BB stand for bank borrowing CA+BB = 1.35 CL+BB 25,000+BB = 1.35 18,000+BB 1.35x 18,000 + 1.35 BB = 25,000 + BB 0.35BB = 25,000- 24,300 = 700 BB = 700/0.35 = 2,000
11. LNG’s current assets and current liabilities are 200,000 and 140,000 respectively. How much additional funds can it borrow from banks for short term, without reducing the current ratio below 1.33?
Solution:
CA = 200,000 CL = 140,000 Let BB stand for bank borrowing
CA+BB = 1.33 CL+BB 200,000+BB = 1.33 140,000+BB 1.33 x 140,000 + 1.33BB = 200,000 + BB 0.33 BB = 200,000- 186,200 = 13,800 BB =13,800/0.33 = 41,818
12. Navneet’s current assets and current liabilities are 10,000,000 and 7,000,000 respectively. How much additional funds can it borrow from banks for short term, without reducing the current ratio below 1.4?
Solution:
CA = 10,000,000 CL = 7,000,,000 Let BB stand for bank borrowing
CA+BB = 1.4 CL+BB 10,000,000+BB = 1.4 7,000,000+BB 1.4 x 7,000,000 + 1.4BB = 10,000,000 + BB 0.4 BB = 10,000,000- 9,800,000 = 200,000 BB = 200,000/0.40 = 500,000
13. A firm has total annual sales (all credit) of 25,000,000 and accounts receivable of 8,000,000. How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to 6,000,000?
Solution:
25,000,000
Average daily credit sales = = 68,493 365
If the accounts receivable has to be reduced to 6,000,000 the ACP must be: 6,000,000
= 87.6 days 68,493
14. A firm has total annual sales (all credit) of 1,200,000 and accounts receivable of 500,000. How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to 300,000?
Solution:
1,200,000
Average daily credit sales = = 3287.67 365
If the accounts receivable has to be reduced to 300,000 the ACP must be: 300,000
= 91.3 days 3287.67
15. A firm has total annual sales (all credit) of 100,000,000 and accounts receivable of 20,000,000. How rapidly (in how many days) must accounts receivable be collected if management wants to reduce the accounts receivable to 15,000,000?
Solution:
100,000,000
Average daily credit sales = = 273,972.6 365
If the accounts receivable has to be reduced to 15,000,000 the ACP must be: 15,000,000
= 54.8 days 273,972.6
16. The financial ratios of a firm are as follows.
Current ratio = 1.25
Acid-test ratio = 1.10
Current liabilities = 2000 Inventory turnover ratio = 10 What is the sales of the firm?
Solution:
Current assets = Current liabilities x Current ratio
= 2000 x 1.25 = 2500
Current assets - Inventories = Current liabilities x Acid test ratio = 2000 x 1.10 = 2200 Inventories = 300
Sales = Inventories x Inventory turnover ratio
17. The financial ratios of a firm are as follows.
Current ratio = 1.33
Acid-test ratio = 0.80
Current liabilities = 40,000 Inventory turnover ratio = 6 What is the sales of the firm?
Solution:
Current assets = Current liabilities x Current ratio = 40,000 x 1.33 = 53,200
Current assets - Inventories = Current liabilities x Acid test ratio = 40,000 x 0.80 = 32,000 Inventories = 21,200
Sales = Inventories x Inventory turnover ratio = 21,200 x 6 = 127,200 18. The financial ratios of a firm are as follows.
Current ratio = 1.6
Acid-test ratio = 1.2
Current liabilities = 2,000,000 Inventory turnover ratio = 5
What is the sales of the firm?
Solution:
Current assets = Current liabilities x Current ratio
= 2,000,000 x 1.6 = 3,200,000 Current assets - Inventories = Current liabilities x Acid test ratio
= 2,000,000 x 1.2 = 2,400,000 Inventories = 800,000
Sales = Inventories x Inventory turnover ratio = 800,000 x 5 = 4,000,000
19. Complete the balance sheet and sales data (fill in the blanks) using the following financial data:
Debt/equity ratio = 0.80
Acid-test ratio = 1.1
Total assets turnover ratio = 2 Days' sales outstanding in
Accounts receivable = 30 days Gross profit margin = 30 percent Inventory turnover ratio = 6
Balance sheet
Equity capital 80,000 Plant and equipment . . . . Retained earnings 50,000 Inventories . . . . Short-term bank borrowings . . . . Accounts receivable . . . .
Cash . . . .
. . . . . . . .
Sales . . . .
Cost of goods sold ……..
Solution:
Debt/equity = 0.80
Equity = 80,000 + 50,000 = 130,000
So Debt = Short-term bank borrowings = 0.8 x 130,000 = 104,000 Hence Total assets = 130,000+104,000 = 234,000
Total assets turnover ratio = 2
So Sales = 2 x 234,000 = 468,000 Gross profit margin = 30 per cent
So Cost of goods sold = 0.7 x 468,000 = 327,600
Day’s sales outstanding in accounts receivable = 30 days Sales So Accounts receivable = x 30 360 468,000 = x 30 = 39,000 360
Cost of goods sold 327,600
Inventory turnover ratio = = = 6
So Inventory = 54,600
As short-term bank borrowing is a current liability, Cash + Accounts receivable Acid-test ratio = Current liabilities Cash + 39,000 = = 1.1 104 ,000 So Cash = 75,400
Plant and equipment = Total assets - Inventories – Accounts receivable – Cash = 234,000 - 54,600 - 39,000 – 75,400
= 65,000
Putting together everything we get
Balance Sheet
Equity capital 80,000 Plant & equipment 65,000
Retained earnings 50,000 Inventories 54,600
Short-term bank borrowings 104,000 Accounts receivable 39,000
Cash 75,400
234,000 234,000
Sales 468,000
Cost of goods sold 327,600
20. Complete the balance sheet and sales data (fill in the blanks) using the following financial data:
Debt/equity ratio = 0.40
Acid-test ratio = 0.9
Total assets turnover ratio = 2.5 Days' sales outstanding in
Accounts receivable = 25 days Gross profit margin = 25 percent Inventory turnover ratio = 8
Balance sheet
Equity capital 160,000,000 Plant and
equipment---Retained earnings 30,000,000 Inventories ………
Short-term bank borrowings . . . …… Accounts receivable ….. . . .
Cash . . . .
. . . . . . . .
Sales ....….
Solution:
Debt/equity = 0.40
Equity = 160,000,000 + 30,000,000 = 190,000,000
So Debt = Short-term bank borrowings = 0.4 x 190,000,000 = 76,000,000 Hence Total assets = 190,000,000+ 76,000,000 = 266,000,000
Total assets turnover ratio = 2.5
So Sales = 2.5 x 266,000,000 = 665,000,000 Gross profit margin = 25 per cent
So Cost of goods sold = 0.75 x 665,000,000 = 498,750,000 Day’s sales outstanding in accounts receivable = 25 days
Sales So Accounts receivable = x 25 360 665,000,000 = x 25 = 46,180,556 360
Cost of goods sold 498,750,000
Inventory turnover ratio = = = 8
Inventory Inventory So Inventory = 62,343,750
As short-term bank borrowings is a current liability, Cash + Accounts receivable Acid-test ratio = Current liability Cash + 46,180,556 = = 0.9 76,000 ,000 So Cash = 22,219,444
Plant and equipment = Total assets - Inventories – Accounts receivable – Cash = 266,000,000 - 62,343,750 - 46,180,556 – 22,219,444 = 135,256,250
Putting together everything we get
Balance Sheet
Equity capital 160,000,000 Plant & equipment 135,256,250 Retained earnings 30,000,000 Inventories 62,343,750 Short-term bank borrowings 76,000,000 Accounts receivable 46,180,556
Cash 22,219,444
266,000,000 266,000,000
Sales 665,000,000
21. Complete the balance sheet and sales data (fill in the blanks) using the following financial data:
Debt/equity ratio = 1.5
Acid-test ratio = 0.3
Total assets turnover ratio = 1.9 Days' sales outstanding in
Accounts receivable = 25 days Gross profit margin = 28 percent Inventory turnover ratio = 7
Balance sheet
Equity capital 600,000 Plant and equipment . . . . Retained earnings 100,000 Inventories . . . . Short-term bank borrowings . . . Accounts receivable . . . .
Cash . . . .
. . . . . . . .
Sales . . . …..
Cost of goods sold ………
Solution:
Debt/equity = 1.5
Equity = 600,000 + 100,000 = 700,000
So Debt = Short-term bank borrowings =1.5 x 700,000 = 1050,000 Hence Total assets = 700,000+1050,000 = 1,750,000
Total assets turnover ratio = 1.9
So Sales = 1.9 x 1,750,000 = 3,325,000 Gross profit margin = 28 per cent
So Cost of goods sold = 0.72 x 3,325,000 = 2,394,000 Day’s sales outstanding in accounts receivable = 25 days
Sales So Accounts receivable = x 25 360 3,325,000 = x 25 = 230,903 360
Cost of goods sold 2,394,000
Inventory turnover ratio = = = 7
Inventory Inventory So Inventory = 342,000
As short-term bank borrowings is a current liability , Cash + Accounts receivable Acid-test ratio = Current liabilities Cash + 230,903 = = 0.3 1050 ,000 So Cash = 84,097
Plant and equipment = Total assets - Inventories – Accounts receivable – Cash = 1,750,000 – 342,000 – 230,903 – 84,097
= 1,093,000
Putting together everything we get
Balance Sheet
Equity capital 600,000 Plant &equipment 1,093,000
Retained earnings 100,000 Inventories 342,000
Short-term bank borrowings 1050,000 Accounts receivable 230,903
Cash 84,097
1,750,000 1,750,000
Sales 3,325,000
Cost of goods sold 2,394,000
22. Compute the financial ratios for Acme Ltd. Evaluate Acme's performance with reference to the standards.
Acme Limited Balance Sheet, March 31, 20X7 Liabilities and Equity
Equity capital Rs.60,000,000
Reserves and surplus 45,000,000
Long-term debt 72,000,000
Short-term bank borrowing 40,000,000
Trade creditors 30,000,000
Provisions 15,000,000
Total 62,000,000
Assets
Fixed assets (net) Rs.110,000,000
Current assets
Cash and bank 30,000,000
Inventories 61,000,000
Pre-paid expenses 10,000,000
Others 6,000,000
Total 262,000,000
Acme Limited Profit and Loss Account for the Year Ended March 31, 20X7
Net sales Rs.320,000,000
Cost of goods sold 204,000,000
Gross profit 116,000,000
Operating expenses 50,000,000
Operating profit 66,000,000
Non-operating surplus 4,000,000
Profit before interest and tax 70,000,000
Interest 12,000,000
Profit before tax 58,000,000
Tax 20,000,000
Profit after tax 38,000,000
Dividends 4,000,000 Retained earnings 34,000,000 Acme Standard Current ratio 1.3 Acid-test ratio 0.70 Debt-equity ratio 2.0
Times interest covered ratio 4.5
Inventory turnover ratio 5.0
Average collection period 45 days
Total assets turnover ratio 1.5
Net profit margin ratio 8 %
Earning power 20 %
Return on equity 18 %
Solution:
For purposes of ratio analysis, we may recast the balance sheet as under. Let assume that ‘Others’ in the balance sheet represents other current assets. Liabilities and Equity
Equity capital .60,000,000
Reserves and surplus 45,000,000
Long-term debt 72,000,000
Short-term bank borrowing 40,000,000
Fixed assets (net) 110,000,000 Current assets
Cash and bank 30,000,000 Receivables 45,000,000 Inventories 61,000,000 Pre-paid expenses 10,000,000 Others 6,000,000 152,000,000 Less: Current liabilities Trade creditors 30,000,000 Provisions 15,000,000 45,000,000
Net current assets 107,000,000
Total 217,000,000
Current assets (i) Current ratio =
Current liabilities 152,000,000
= = 1.8
85,000,000
(Current liabilities here includes short-term bank borrowing also) Current assets – Inventories 91,000,000
(ii) Acid-test ratio = = = 1.1
Current liabilities 85,000,000 (Current liabilities here includes short-term bank borrowing also)
Long-term debt + Short-term bank borrowing (iii) Debt-equity ratio =
Equity capital + Reserves & surplus 72,000,000 + 40,000,000
= = 1.1
60,000,000 + 45,000,000
Profit before interest and tax (iv) Times interest coverage ratio =
Interest 70,000,000
= = 5.83
12,000,000
Cost of goods sold 204,000,000
(v) Inventory turnover period = = = 3.34
Inventory 61,000,000
365 (vi) Average collection period =
Net sales / Accounts receivable 365
= = 51.3 days
320,000,000/45,000,000 (vii)
Total assets =Equity + Total debt =( 60,000,000 + 45,000,000 ) +(72,000,000+40,000,000)
= 217,000,000
Net sales 320,000,000
Total assets turnover ratio = = = 1.5
Total assets 217,000,000 Profit after tax 38,000,000
(ix) Net profit margin = = = 11.9%
Net sales 320,000,000 PBIT 70,000,000
(x) Earning power = = = 32.3 %
Total assets 217,000,000 Equity earning 38,000,000
(xi) Return on equity = = = 36.2 %
Net worth 105,000,000
The comparison of the Acme’s ratios with the standard is given below
Acme Standard
Current ratio 1.8 1.3
Acid-test ratio 1.1 0.7
Debt-equity ratio 1.1 2.0
Times interest covered ratio 5.8 4.5 Inventory turnover ratio 3.3 5.0 Average collection period 51.3 days 45 days Total assets turnover ratio 1.5 1.5 Net profit margin ratio 11.9 % 8 %
Earning power 32.3 % 20 %
Return on equity 36.2 % 18 %
23. Compute the financial ratios for Nainar Ltd. Evaluate Nainar's performance with reference to the standards.
Nainar Limited Balance Sheet, March 31, 20X7 Liabilities and Equity
Equity capital Rs.100,000,000
Reserves and surplus 65,000,000
Long-term debt 140,000,000
Short-term bank borrowing 70,000,000
Trade creditors 24,000,000
Provisions 19,000,000
Total 418,000,000
Assets
Fixed assets (net) Rs.206,000,000
Current assets
Cash and bank 25,000,000
Receivables 70,000,000
Inventories 85,000,000
Pre-paid expenses 20,000,000
Others 12,000,000
Total 418,000,000
Nainar Limited Profit and Loss Account for the Year Ended March 31, 20X7
Net sales Rs.740,000,000
Cost of goods sold 520,000,000
Gross profit 220,000,000
Operating expenses 102,000,000
Operating profit 118,000,000
Non-operating surplus 12,000,000
Profit before interest and tax 130,000,000
Interest 22,000,000
Profit before tax 108,000,000
Tax 46,000,000
Profit after tax 62,000,000
Dividends 20,000,000 Retained earnings 42,000,000 Nainar Standard Current ratio 1.7 Acid-test ratio 1.0 Debt-equity ratio 1.4
Times interest covered ratio 5.5
Inventory turnover ratio 6.0
Average collection period 40 days
Total assets turnover ratio 2.0
Net profit margin ratio 8 %
Earning power 30 %
Solution:
For purposes of ratio analysis, we may recast the balance sheet as under. Let assume that ‘Others’ in the balance sheet represents other current assets. Liabilities and Equity
Equity capital 100,000,000
Reserves and surplus 65,000,000
Long-term debt 140,000,000
Short-term bank borrowing 70,000,000
Total 375,000,000
Assets
Fixed assets (net) 206,000,000
Current assets
Cash and bank 25,000,000 Receivables 70,000,000 Inventories 85,000,000 Pre-paid expenses 20,000,000 Others 12,000,000 212,000,000 Less: Current liabilities Trade creditors 24,000,000 Provisions 19,000,000 43,000,000
Net current assets 169,000,000
Total 375,000,000
Current assets (i) Current ratio =
Current liabilities 212,000,000
= = 1.9
113,000,000
( Current liabilities here includes short-term bank borrowing also) Current assets – Inventories 127,000,000
(ii) Acid-test ratio = = = 1.1
Current liabilities 113,000,000 ( Current liabilities here includes short-term bank borrowing also)
Long-term debt + Short-term bank borrowing (iii) Debt-equity ratio =
140,000,000 + 70,000,000
= = 1.3
100,000,000 + 65,000,000
Profit before interest and tax (iv) Times interest coverage ratio =
Interest 130,000,000
= = 5.9
22,000,000
Cost of goods sold 520,000,000
(v) Inventory turnover period = = = 6.1
Inventory 85,000,000
365 (vi) Average collection period =
Net sales / Accounts receivable 365
= = 34.5 days
740,000,000/70,000,000 (vii)
Total assets = Equity + Total debt =(100,000,000 + 65,000,000 ) +(140,000,000+70,000,000)
= 375,000,000
Net sales 740,000,000
Total assets turnover ratio = = = 2.0
Total assets 375,000,000 Profit after tax 62,000,000
(ix) Net profit margin = = = 8.4 %
Net sales 740,000,000 PBIT 130,000,000
(x) Earning power = = = 34.7 %
Total assets 375,000,000 Equity earning 62,000,000
(xi) Return on equity = = = 37.6 %
Net worth 165,000,000
Nainar Standard
Current ratio 1.9 1.7
Acid-test ratio 1.1 1.0
Debt-equity ratio 1.3 1.4
Times interest covered ratio 5.9 5.5 Inventory turnover ratio 6.1 6.0 Average collection period 34.5 days 40 days Total assets turnover ratio 2.0 2.0 Net profit margin ratio 8.4 % 8 %
Earning power 34.7 % 30 %
Return on equity 37.6 % 35 %
24. The comparative balance sheets and comparative Profit and Loss accounts for Nalvar Limited, are given below:
Comparative Balance Sheets, Nalvar Limited
(Rs. in million) 20X3 20X4 20X5 20X6 20X7
Share capital 1.6 1.6 1.8 1.8 2
Reserves and surplus 1.0 1.6 2.4 2.3 3
Long-term debt 1.4 1.5 1.8 1.6 1.4
Short-term bank borrowing 1.3 1.5 1.7 1.5 1.2
Current liabilities 1.1 1.3 1.5 1.6 1.8
Total 6.4 7.5 9.2 8.8 9.4
Assets
Net fixed assets 1.2 1.4 2 1.7 2
Current assets
Cash and bank 0.3 0.3 0.2 0.4 0.3
Receivables 1.8 2.1 2.5 2.4 2.5
Inventories 1.8 2.2 2.8 2.4 2.8
Other assets 1.3 1.5 1.7 1.9 1.8
Comparative Profit and Loss Accounts, Nalvar Limited (Rs. in million)
20X3 20X4 20X5 20X6 20X7
Net sales 3.8 4.2 5.3 6.5 7.8
Cost of goods sold 2.6 3.1 3.9 4 4.8
Gross profit 1.2 1.1 1.4 2.5 3
Operating expenses 0.3 0.3 0.4 0.6 0.6
Operating profit 0.9 0.8 1 1.9 2.4
Non-operating surplus deficit 0.1 0.2 0.1 0.3 0.3 Profit before interest and tax 1 1 1.1 2.2 2.7
Interest 0.1 0.1 0.2 0.1 0.1
Profit before tax 0.9 0.9 0.9 2.1 2.6
Tax 0.05 0.08 1 1.2 1.2
Profit after tax 0.85 0.82 -0.1 0.9 1.4
Required: Compute the important ratios for Nalvar Limited for the years 20X3-20X7. You may assume that other assets in the balance sheet rep resent other current assets.
• Current ratio • Debt-equity ratio
• Total assets turnover ratio • Net profit margin
• Earning power • Return on equity
Solution:
We will rearrange the balance sheets as under for ratio analysis. It is assumed that ‘Other assets’ are other current assets
Liabilities and Equity
20X3 20X4 20X5 20X6 20X7
Share capital 1.6 1.6 1.8 1.8 2
Reserves and surplus 1 1.6 2.4 2.3 3
Long-term debt 1.4 1.5 1.8 1.6 1.4
Short-term bank
borrowing 1.3 1.5 1.7 1.5 1.2
Total 5.3 6.2 7.7 7.2 7.6
Assets
Net fixed assets 1.2 1.4 2 1.7 2
Current assets
Cash and bank 0.3 0.3 0.2 0.4 0.3
Receivables 1.8 2.1 2.5 2.4 2.5
Other current assets 1.3 5.2 1.5 6.1 1.7 7.2 1.9 7.1 1.8 7.4 Less: Current liabilities
Other current liabilities 1.1 1.1 1.3 1.3 1.5 1.5 1.6 1.6 1.8 1.8
Net current assets 4.1 4.8 5.7 5.5 5.6
Total 5.3 6.2 7.7 7.2 7.6
The required ratios are as under:
20X3 20X4 20X5 20X6 20X7
• Current ratio 2.2 2.2 2.3 2.3 2.5
• Debt-equity ratio 1.0 0.9 0.8 0.8 0.5
Total assets turnover ratio 0.7 0.7 0.7 0.9 1.0
• Net profit margin(%) 22.4 19.5 -1.9 13.8 17.9 • Earning power (%) 18.9 16.1 14.3 30.6 35.5 • Return on equity (%) 32.7 25.6 -2.4 22.0 28.0
26. The comparative balance sheets and comparative Profit and Loss accounts for Somani Limited, a machine tool manufacturer, are given below:
Comparative Balance Sheets, Somani Limited (Rs. in million)
20X3 20X4 20X5 20X6 20X7
Share capital 41 50 50 50 55
Reserves and surplus 16 36 72 118 150
Long-term debt 28 25 30 29 22
Short-term bank borrowing 35 30 36 38 38
Current liabilities 24 28 30 30 25
Total 144 169 218 265 290
Assets
Net fixed assets 72 80 75 102 103
Current assets
Cash and bank 8 9 15 12 11
Receivables 24 30 59 62 85
Inventories 35 42 55 75 79
Other Assets 5 8 14 14 12
Comparative Profit & Loss Account of Somani Ltd
(Rs. in million) 20X3 20X4 20X5 20X6 20X7
Net sales 285 320 360 350 355
Cost of goods sold 164 150 170 175 174
Gross profit 121 170 190 175 181
Operating expenses 64 66 68 68 64
Operating profit 57 104 122 107 117
Non-operating surplus deficit 3 4 4 3 3
Profit before interest and tax 60 108 126 110 120
Interest 8 6 10 12 12
Profit before tax 52 102 116 98 108
Tax 15 26 30 26 29
Profit after tax 37 76 86 72 79
Compute the following ratios for years 20X3-20X7: • Current ratio
• Debt-equity ratio
• Total assets turnover ratio • Net profit margin
• Earning power • Return on equity
For ratio analysis purpose, we will rearrange the balance sheet as under. It is assumed that ‘Other assets’ are other current assets
20X3 20X4 20X5 20X6 20X7
Share capital 41 50 50 50 55
Reserves and surplus 16 36 72 118 150
Long-term debt 28 25 30 29 22
Short-term bank
borrowing 35 30 36 38 38
Total 120 141 188 235 265
Assets
Net fixed assets 72 80 75 102 103
Current assets
Cash and bank 8 9 15 12 11
Receivables 24 30 59 62 85
Inventories 35 42 55 75 79
Other assets 5 72 8 89 14 143 14 163 12 187 Less : Current liabilities 24 24 28 28 30 30 30 30 25 25
Net current assets 48 61 113 133 162
Total 120 141 188 235 265
20X3 20X4 20X5 20X6 20X7
• Current ratio 1.2 1.5 2.2 2.4 3.0
• Debt-equity ratio 1.1 0.6 0.5 0.4 0.3 • Total assets turnover ratio 2.4 2.3 1.9 1.5 1.3 • Net profit margin (%) 13.0 23.8 23.9 20.6 22.3 • Earning power (%) 50.0 76.6 67.0 46.8 45.3 • Return on equity (%) 64.9 88.4 70.5 42.9 38.5
26. The Balance sheets and Profit and Loss accounts of LKG Corporation are given below. Prepare the common size and common base financial statements
Balance Sheets (Rs. in million) 20x6 20x7 Shareholders’ funds 256 262 Loan funds 156 212 Total 412 474 Fixed assets 322 330 Investments 15 15
Net current assets 75 129
Total 412 474
Profit & Loss Accounts
(Rs. in million) 20x6 20x7
Net sales 623 701
Cost of goods sold 475 552
Gross profit 148 149 PBIT 105 89 Interest 22 21 PBT 83 68 Tax 41 34 PAT 42 34
Solution:
Common Size statements:
Profit and Loss Account Regular ( in
Rs. million) Common Size(%)
20x6 20x7 20x6 20x7
Net sales 623 701 100 100
Cost of goods sold 475 552 76 79
Gross profit 148 149 24 21 PBIT 105 89 17 13 Interest 22 21 4 3 PBT 83 68 13 10 Tax 41 34 7 5 PAT 42 34 7 5 Balance Sheet Regular ( in
million) Common Size(%)
20x6 20x7 20x6 20x7 Shareholders' funds 256 262 62 55 Loan funds 156 212 38 45 Total 412 474 100 100 Fixed assets 322 330 78 70 Investments 15 15 4 3
Net current assets 75 129 18 27
Total 412 474 100 100
27. The Balance sheets and Profit and Loss accounts of Grand Limited are given below. Prepare the common size and common base financial statements
Balance Sheet 20x6 20x7 Shareholders’ fund 85 85 Loan funds 125 180 Total 210 265 Fixed assets 127 170 Investments 8 10
Net current assets 75 85
Profit & Loss Account
20x6 20x7
Net sales 450 560
Cost of goods sold 320 410
Gross profit 130 150 PBIT 85 98 Interest 12 17 PBT 73 81 Tax 22 38 PAT 51 43 Solution: Balance Sheet Regular (Rs. in million) Common Size(%) 20x6 20x7 20x6 20x7 Shareholders' funds 85 85 40 32 Loan funds 125 180 60 68 Total 210 265 100 100 Fixed assets 127 170 60 64 Investments 8 10 4 4
Net current assets 75 85 36 32
Total 210 265 100 100
Profit & Loss Account Regular (Rs. in million) Common Size(%) 20x6 20x7 20x6 20x7 Net sales 450 560 100 100
Cost of goods sold 320 410 71 73
Gross profit 130 150 29 27 PBIT 85 98 19 18 Interest 12 17 3 3 PBT 73 81 16 14 Tax 22 38 5 7 PAT 51 43 11 8
Common base year statements Balance Sheet
Regular (Rs. in million)
Common base year (%) 20x6 20x7 20x6 20x7 Shareholders' funds 85 85 100 100 Loan funds 125 180 100 144 Total 210 265 100 126 Fixed assets 127 170 100 134 Investments 8 10 100 125
Net current assets 75 85 100 113
Total 210 265 100 126
Profit & Loss Account
Regular (Rs. in million) Common base year (%) 20x6 20x7 20x6 20x7 Net sales 450 560 100 124
Cost of goods sold 320 410 100 128
Gross profit 130 150 100 115 PBIT 85 98 100 115 Interest 12 17 100 142 PBT 73 81 100 111 Tax 22 38 100 173 PAT 51 43 100 84